Perspectives on Spain's economy and fiscal consolidation
Fecha: noviembre 2023
SEFO, Spanish and International Economic & Financial Outlook, V. 12 N.º 6 (November 2023)
Index
GDP growth is expected to slow to 1.5% in 2024, down 0.9% from this year, although still significantly above the EU average, with inflation also expected to moderate further. Spain’s key source of vulnerability remains its fiscal imbalance at a time when sovereign borrowing costs are rising sharply, highlighting the need for growth-friendly fiscal consolidation.
September’s annual revision of Spain’s national accounts data for the years 2020 to 2022 resulted in an upward adjustment to the initially forecast GDP growth figures for 2021 and 2022, underpinned by substantial revisions to the components of GDP growth. While the revisions reveal a better-thanexpected performance of the manufacturing sector, worse than anticipated investment figures are worrisome in the context of the high degree of potential funding resources available to Spain under Next Generation EU (NGEU).
The high expectations for the recovery in international tourism appear to have been met this summer by comparison with 2019, particularly in terms of daily tourist expenditure. Going forward, expected increases in tourism from source markets with higher on average purchasing power is helping to underpin a constructive outlook for the Spanish tourism sector in 2024.
Growth in total state revenue is expected to slow in 2024, while growth in public expenditure is forecast to slow over the same time frame. Given that wage and pension increases will continue to put upward pressure on the deficit, achievement of the 3.0% of GDP target required under EU fiscal rules will be difficult.
After Spain’s public deficit initially soared to 10% of GDP and the public debt level rose to historical highs of 120% of GDP in the wake of the pandemic, reactivation of the economy and significant growth in tax revenue has since helped to underpin improvement in the county’s fiscal metrics. However, under a stricter EU fiscal framework, budgetary stability in Spain will face significant hurdles, unless further fiscal adjustments and reforms are implemented.
After one year of intense interest rate increases, coupled with very slow pass-through to deposit rates, households have moved decisively to reconfigure their savings, and also their borrowings. In this process of recomposition of household financial flows and the search for an alternative to deposits, the early cancellation of debts, especially variable rate mortgages, which are undoubtedly the most affected by the rise in interest rates, has gained increasing significance.
In what looks to be the tail end of the monetary policy tightening cycle, the insurance business in Spain is staging spectacular growth in revenue (premiums), fuelled by life insurance products. With rates now looking more likely to stay high for longer, momentum in these products is expected to continue; however, from a broader perspective, the sector is likely to suffer, particularly in the non-life business, from the economic slowdown and high costs of claims in the motor insurance segment.
The ultra-expansionary monetary policy in place until 2021 had the obvious benefit of providing official liquidity at a time when the banks were finding it hard to raise it privately. The disappearance of that official liquidity will foreseeably translate into higher deposit betas across the eurozone, including in Spain, where the process is already beginning to accelerate, albeit with a lag relative to the eurozone average.